AKP paves way for dirty money to enter Turkey, leaving country’s banks in a bind
The race to Turkey’s June 24 parliamentary and presidential elections has put the government in a state of panic, particularly when it comes to the economy. President Recep Tayyip Erdoğan’s administration is unleashing everything to “bring in a vote or a dollar”.
Many have speculated that one of the reasons for Erdoğan’s call for early elections was due to deepening financial woes, including a growing current account deficit, a rapid devaluation of the lira, and rising inflation.
In a move to shore up capital before the elections and to bring foreign assets back into the country, the government renewed the cash repatriation law for the fifth time. In a last-ditch effort to find resources, Finance Minister Naci Ağbal said the government would take only 3% in taxes from any money brought into the country, no questions asked.
The law, which was first introduced during the global financial crisis in 2008, brought in an impressive $130 billion into the country. The last time the cash repatriation law was introduced was in July 2016, but it failed to bring in significant cash flow. Even though the law was extended by six months, no one was able to trust the government or the economy.
The Ministry of Finance only has the results of the 2008 cash repatriation law on its website and says 65 people brought in 48.3 billion lira ($11 billion). Needless to say, the government is not too hopeful about the latest cash repatriation law. Agbal said he expected 16 billion lira, only one-third of the amount that came in during 2008.
The government has been unable to produce a new model, even though it has tried with other initiatives such as the tax amnesty, the social security amnesty … the list goes on.
Because the administration cannot produce a new model, state-owned Ziraat Bank is acting as the government's cash register. In early April, Ziraat Bank secured a $1.4-billion syndicated loan from 44 banks in 21 countries and gave $700 million of the money as a 10-year loan to the pro-government Turkish conglomerate Demirören Group. The Demirören Group then used this money to purchase Doğan Media Group, which is the country’s largest media group.
Earlier this week, in a meeting with the Banks Association of Turkey (TBB), Prime Minister Binanli Yıldırım tasked Ziraat Bank to helping the government in the elections by providing for low-interest housing loans.
Ziraat Bank's primary function of financing farmers, manufacturers, animal husbandry, and agriculture has been transformed into siphoning money to media bosses and government sweethearts.
Ziraat Bank will begin providing housing loans at a rate of 1 percent per month. This helps contractors in the construction industry who are on the brink of going bankrupt. This interest subsidy will be recorded as a duty loss and will be taken out of state coffers. The Treasury will take out a loan from Ziraat Bank at 15-16 percent interest to cover the loss.
The Treasury's debt will be written into the budget, and the citizens will be the ones who pay for the budget deficit through tax increases and hikes in the prices of electricity/natural gas/fuel, and inflation.
No one in the banking industry is able to say the government’s demands are unsustainable for the banking sector. Most private banks operating within holding companies work with the government in some capacity.
Could Ahmet Çalık - who is the head of Aktifbank and has government connections to carry out energy projects - say no to the president's call for low-interest housing loans?
Or what about Sabancı-owned Akbank’s ties with the government for its electricity distribution tenders for its Energy-Sa company? Or Denizbank, which is owned by Russian-owned Sberbank, headed by Herman Gref, a friend to both Erdoğan and Putin? Or QNB Finansbank, which is sponsored by Qatar’s emir who has good relations with the Turkish government?
One veteran banker who has no connection with the administration has been outspoken. Ersin Özince, Chairman of the Board of Directors of Iş Bank, said at an international banking conference in Ankara in early May:
"It's on the tips of everyone's tongue that the banks get a lot, they charge interest, the banks do this and do that. Should we expect the banks to do everything? The bridges and houses will be built by banks. Decades of my working life passed during the period when it was forbidden for banks to lend to real estate.”
Why is it not allowed? Because real estate financing is not done by commercial banks. That is why it is not allowed. You cannot take out a mortgage from banks that depend on a 1-month deposit. No such model of housing finance exists anywhere in the world. If you do this, then the banking system will collapse."
Özince’s statement was a cry for help from international markets for the Turkish banking sector, which is subjugated to political interests.
Mehmet Ali Akben, the chairman of the Banking Regulation and Supervision Agency said: "Turkish banks have no problem finding funds from abroad. However, in the recent period, the maturity has shortened and the costs of finding finance have increased." This was a timid way of confessing that the banking system is unsustainable.
In other words, Ziraat's $1.4 billion syndicated credit and bank's 10-year credit to Demirören is unsustainable.
Hakan Özyıldız, former general manager of the Treasury’s Bank and Foreign Exchange, took a snapshot of Turkey's banking system in a blog post. Ozyıldız's analysis of the ratio of the bank's non-performing loans to the shareholder's equity and paid-in capital shows the gravity of this situation.
According to data released by Turkey’s Banking Regulation and Supervisory Agency and the TBB, the banks wrote off 41 billion lira in loans and had 78 billion lira in structured loans at the end of 2017. The banking sector had 61 billion lira in non-performing receivables at the end of the year. Non-performing loans increased from 55 billion lira five years ago to 181 billion lira at the end of 2017. The ratio of non-performing loans to shareholder equity also rose from 30 percent in 2012 to 50 percent in 2017, and the ratio to paid-in capital more than doubled from 101 percent in 2012 to 213 percent at the end of the year.
Of course, we would not be wrong to conclude that this situation is becoming more and more complicated given that giants like Ülker, Doğus, and Unit Energy have also applied for loans in the past month.
In his blog, Özyıldız said: "In this context, if there hadn't been guarantees from the Credit Guarantee Fund and therefore no guarantees from the Treasury, then the banks wouldn't have been able to offer this much credit last year. In this respect, the banks reduced their reserves for non-performing loans. They were able to give more credit. Thus, the growth rate was able to reach 7.4 percent."
So it seems that Erdoğan and the AKP have taken a chance of collapsing the banking system to do whatever it takes to win the June 24 elections. They have taken the chance of leaving behind an economic mess should they lose to the next administration.